The revelation that a financial institution is using illegal ways to attract new customers and increase deposits may fuel an explosion of interest in the company’s operating practices, especially if regulators think management hasn’t set effective policies to prevent the unlawful practices. If properly implemented, these procedures enable financial institutions -- and all companies, for that matter -- to properly report customer deposits, whether they use cash-basis accounting or accrual-basis accounting.

Customer Deposits

The term "customer deposits" may cover banking operations or non-banking activities. In the latter, a client pays in advance for work that a company will perform or merchandise it will deliver in the future. Deposits also represent money bank clients entrust the financial institution with the task of safeguarding the cash and -- in some cases -- paying interest on it. These sums of money come from accounts as varied as checking, interest and investment. For a bank, growing customer deposits is a profit generator because the financial institution uses client funds to lend, invest in attractive business deals and undertake important capital-markets activities, such as buying and selling stocks and bonds. The bank usually spearheads the latter initiatives via such public exchanges as the New York Stock Exchange and London Stock Exchange.

Cash Accounting

In cash accounting, a business gives record-keeping prominence to transactions that involve monetary outflows and inflows. Simply put, corporate bookkeepers post journal entries only when the organization ponies up money for operating expenses or receives cash from customers or other business partners -- such as vendors and fiscal authorities -- in the form of refunds.


For a company -- whether it be a bank or a non-financial business -- customer deposits are not income items and, therefore, do not go into taxable income calculation. This assertion doesn't depend on the accounting method the business uses, so using a cash-basis or accrual accounting method doesn't matter. Taxable income, or pre-tax income, equals total revenues minus total expenses, excluding fiscal charges. Non-bank accountants treat client deposits as unearned revenue, which is a short-term liability. In the banking sector, customer deposits also are operating liabilities, but institutions do not treat them as unearned revenue. Client advances make into the "operating income items" category when a company provides the merchandise or performs services for which it received the money in the first place.

Financial Reporting

Taxable income is integral to a company's statement of profit and loss, also known as an income statement or report on income. Unearned revenue is part of a balance sheet, which accountants also call a "statement of financial position" or "statement of financial condition."